Global policymakers seek to reassure after market turbulence

DAVOS, Switzerland – At the end of another turbulent week in financial markets, leading global policymakers sought Saturday to ease concerns over the economic outlook for 2016 and insisted that the slowdown in China is a natural turn for an economy in transition.

A high-level panel of finance officials held on the last day of the World Economic Forum in the Swiss resort of Davos, Switzerland, attempted to look through the markets’ harrowing start to the year and identify the big risks facing the global economy.

Many stock indexes this week fell into bear market territory – down 20 percent from recent highs – and oil prices hit near 13-year lows below $27 a barrel. By the end of the week, the mood had stabilized and markets recovered.

But unease continues to pervade markets and hung over the four-day gathering of high-powered business and world leaders here.

China has been the main trigger for the recent market drop as investors take fright over the implications of a decline in economic growth. Figures last week showed that China grew by 6.9 percent in 2015, its lowest growth rate in a quarter of a century.

“I do not share the pessimistic view about the global economy suggested by these developments in financial markets,” said Bank of Japan Governor Haruhiko Kuroda. “For example, I don’t think the Chinese economy will sharply slow down or will be faced with hard landing risk in the future.”

Kuroda said the slowdown is a natural offshoot of what the Chinese authorities are trying to do: transform the economy from one based on investment and manufacturing into one that is more focused on consumption and services. He suggested China should impose some controls on how much money can leave the country as a means to keep the currency from falling too sharply.

Christine Lagarde, the International Monetary Fund’s managing director, said China’s economic transition is a “massive undertaking.”

Lagarde conceded that global growth in 2016 is set to be “modest” and “uneven” and faces risks, including problems in emerging markets such as Brazil. The dramatic drop in oil prices is putting a stress on many companies and countries.

She stressed, however, that the IMF still expects growth to improve this year 3.4 percent from 3.1 percent in 2015.

EUROPE ON CUSP

For years, the future of what is now the 19-country eurozone has been a central concern at this Davos-ending panel but it barely got a mention now that worries over Greece have eased.

A modest pick-up in economic growth has also bolstered confidence that the single currency zone will not break up but there are new worries this year – fears of a British exit from the wider 28-country European Union and a botched response to the refugee crisis. With at least another 46 people drowning in the waters of the Aegean Sea on Friday, Europe is under huge pressure to find a proper response to the crisis.

European policymakers have said that a strategy on how to handle, process and relocate migrants has to be agreed upon within the next six to eight weeks – before spring arrives and many more people escaping conflicts attempt the hazardous crossings, mainly into Greece and Italy. Failure to come up with a comprehensive strategy by then could spawn further problems, such as the end of the Schengen agreement, a pact that allows borderless travel between 26 European countries.

Lagarde said that from a personal point of view, this is “a bit of a make-or-break” moment for the Schengen agreement.

But if Europe can find a good way to manage the flow of refugees and migrants, the region can actually benefit economically from the new pool of labor.

The IMF has said eurozone economic growth could rise by 0.2 percentage points, as much as 0.5 percent in countries like Germany and Sweden.

BREXIT FEAR

Another concern vexing leaders in Davos all week has been Britain’s future in the EU.

Britain is the EU’s second-largest economy but has, as British finance minister George Osborne said, a “different relationship” to the bloc than the others. It’s not part of the Schengen agreement and doesn’t use the euro.

The Conservative government has promised a referendum on whether Britain should leave the EU by the end of 2017. But it has shown a willingness to hold it earlier, possibly this summer, if a deal reforming its relationship with the EU is agreed upon at a summit in February.

Osborne said there is “goodwill” to get a deal.

Britain is seeking four reforms: changes to rules governing migration and benefits, confirmation that Britain is not part of the drive for an ever-closer union, rules to make sure that the nine non-euro EU countries don’t get dominated by the euro bloc and measures to boost economic competitiveness.

Osborne pointed to the EU’s history of securing deals at the last minute, as it has many times on Greece’s crisis.

“Europe sometimes makes its decisions at the 11th hour in a crisis because the Greek banks have to open on the Monday morning or the bond has to be repaid,” said Osborne. “I think in a mature and measured way we can get that agreement potentially at the February European Council.”

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